The Impact of Political Instability on Forex Markets
The foreign exchange (FX) market is the world’s largest over-the-counter (OTC) market, and it has been heavily impacted by the COVID-19 pandemic. This work studies the information content of trades in the FX market and the ways in which political instability can affect market volatility. We measure forex efficiency through multifractal detrended fluctuation analysis and analyze the impact of threats from political instability on forex markets.
Threats Associated with Political Instability
Political instability, such as regime changes, riots, civil wars, and revolutions, can all disrupt domestic and international financial markets. These events can create uncertainty regarding the relationship between economic and financial trends, and FX markets are no exception. Unrest and instability can cause investors to become more concerned with changes in domestic and international monetary policies, and periods of political instability can create significant risks for investors.
Investigating the Relationship Between Market Volatility and Political Instability
The overall research finding presents that threats associated with political instability do influence the volatility of financial markets. To explore the direct link between risk in the forex markets and political unrest, an analysis of historical market volatility was undertaken. Data was collected from over 16,000 trades from seven major FX currency pairs, which yield over 700 million individual data points. The analysis showed that periods of political unrest result in an increased level of market volatility.
The results showed that political instability contribute to market volatility, but it is important to note that the relationship between the two variables is not linear. The results also presented that periods of political instability can result in the prolonged periods of market volatility and that financial markets might be more sensitive to political events in the short-term than in the long-term.
Conclusion
The results of this analysis demonstrate that political instability can have a significant impact on forex markets. The analysis showed that periods of political instability may cause spikes in volatility, and that this impact is present in both the short and long term. This research contributes to a growing body of evidence demonstrating that the risks posed by political instability require careful consideration by investors. Market risk is the risk posed to an organization’s financial health or profitability due to changes in market prices, such as asset prices, interest rates, commodity prices, and foreign exchange rates. A market risk review is a review of an organization’s exposure to the various risks posed by the markets in which it operates. This review typically consists of an analysis of an organization’s risk profile, its processes for gauging and responding to changes in market conditions, and its overall market-risk management strategy. The point of the review is to make sure that an organization is effectively managing its market risks.
